Cash is King: Managing Cash Flow for Business Survival and Growth

Part 1

Description of Cash Cycle Analysis

The cash cycle represents the use of cash in the day-to-day operations of the business. A cash cycle analysis is a process of looking at how cash might be unnecessarily locked up in the workings of the business. Within any business, there are three areas where cash may be getting unnecessarily ‘trapped’:

1. Accounts receivable

What customers owe for what you’ve sold on credit. This represents money that ‘belongs’ to your business but is currently inaccessible for operating the business.

2. Inventory

Materials, work-in-process, and finished goods on hand for manufacturing and distribution companies or unbilled services for work already performed but not yet invoiced for service firms.

3. Accounts payable

What you owe suppliers for what you’ve bought on credit. This is an area where, if you fully utilise the credit given to you by suppliers, you can release extra cash into your business.

In doing a cash cycle analysis one carefully analyses how much cash is locked up in each of these elements of the business and then works to unlock this cash in a safe and responsible way. How do you perform a cash cycle analysis to unlock cash within your business?

Step 1

Calculate the cash days for each element of the cash cycle

The first step is to understand how many days’ worth of cash are locked up in each element of the cash cycle. The cash locked up in accounts receivable is calculated as the accounts receivable balance divided by the average sales per day. The cash locked up in inventory is calculated as the inventory balance, divided by the average daily cost of sales; and the cash days in accounts payable is the accounts payable balance divided by the average daily cost of sales (see the equations below for the calculation of these amounts). The total days in the cash cycle can then be calculated as accounts receivable days, plus the inventory days less the accounts payable days.

Step 2

Assess whether the number of days’ cash in each element of the cash cycle is reasonable

All businesses need to have some cash tied up in the cash cycle but the key to effective financial management is to reduce the overall days tied up in the cash cycle to a competitive level. Therefore to have more cash to grow the business you need to try to reduce the number of days in accounts receivable and inventory and to increase the number of days in accounts payable within a range that is reasonable and sensible.

Having calculated the number of days in each element of the cash cycle in step 1, the next step is to assess your business days in each element of the cash cycle in relation to:

The number of days in prior periods to see if cash management is improving or declining

The number of days provided for in firm policies (the policies of your firm for accounts receivable and inventory and the policies of your suppliers for accounts payable)

The number of days of other firms in the industry (see alongside)

By comparing the days in each element of the cash cycle over time, one can see whether you have been more or less effective at managing your cash over time. By comparing days to firm policies you can assess if firm policies are actually being implemented and by assessing the days’ cash in comparison to others in the industry you can assess whether you are competitive compared to other firms.

Step 3

Set targets for managing each element of the cash cycle

Most people discover that there is room for improvement with respect to the amount of cash tied up in accounts receivable, accounts payable or inventory. The next step is to set targets to improve these balances. The targets for these amounts should be reasonable within the industry in which the firm operates. You should set targets that are ambitious but not so unreasonable that you are unable to operate effectively. For example it may be an industry norm to expect customers to pay invoices on 30 days. It is then unreasonable to set a target of 15 days for accounts receivable. You may need to keep a certain amount of inventory on hand to maintain customer service levels; it is then destructive to set targets that reduce inventory levels to levels that are dangerously low. It is also unwise to set a target to pay accounts payable on 50 days if your supplier’s policy is 30 days; you will just develop poor relations with your supplier.

Step 4

Start managing each element of the cash cycle

Having set targets for improvement, it is time to go to work on managing these balances to achieve the targets that you have set for your business.

To reduce accounts receivable you could:

Look to get invoices out more efficiently (eg by email). Incentivise the people in accounts to send out invoices as quickly as possible.

Adjust the credit policy to reduce the number of days’ credit allowed to customers (but only do this if it will not have a significant negative effect on sales).

Actively follow-up with customers to collect receivables within the credit terms that you have given them.

Incentivise customers to pay early (eg by offering discounts or rewards).

To manage the inventory levels downward you could:

Identify what inventory you need regularly and what you need less regularly and manage it accordingly, with lower inventory balances for stock that you seldom need.

Keep smaller amounts of stock on hand and set up relationships with suppliers where they agree to provide goods more regularly in smaller batches.

Identify slow moving and obsolete stock and provide incentives to move it off the floor.

To release cash within the accounts receivable balance, you could:

Ensure that you are using the credit terms that customers provide.

Negotiate longer credit terms with customers.

If the targets that you set are reasonable and you implement these tactics in a reasonable and responsible way, over time you should be able to reduce the amount of cash tied up in the cash cycle to achieve your goals and have more cash to build the business.

Step 5

Review progress

The cash cycle needs to be reviewed and managed on an ongoing basis. It is amazing how easy it is for the accounts receivable and inventory balance to creep up if unchecked, thereby sucking cash out of the business. The cash cycle numbers — accounts receivable days, inventory days and accounts payable days — should become part of the monthly management dashboard for any business. Managers who observe that these numbers are moving in the wrong direction should immediately investigate and take action to rectify the situation. In this way you can ensure that the business has as much cash as possible to continually fuel growth. »Many times managers think that a cash injection into a business must come from outside the organisation — they desperately apply for bank loans or try to contact a long lost rich uncle to invest in the business. The reality is that you can often engineer extra cash from inside your business if you just manage your finances more effectively. What can you do to ensure that you have adequate cash to keep your business alive? In this article we will highlight a specific process for managing and unlocking cash in your business.

Accessing financial data on other firms in your industry

The easiest place to find financial information about other firms in your industry is to look at the financial statements of firms that are listed on the JSE or AltX exchange.

These firms are required to publish their annual financial statements so their financial information can be accessed via one of the following sources:

The company website — usually under the investor relations section

The Moneyweb website — go to the website (www.moneyweb.co.za); in the top right corner go to “CLICK-A-COMPANY”; click on the names of the companies that you are interested in and then look for SENS announcements further down the page that contain financial results for the company. From these announcements you can get information required to calculate the number of days in accounts recievable, inventory and/or accounts payable.

Part 2

Case Study

Presto Print

Presto Print is a local printing business doing bulk printing jobs for small and medium size businesses. Samantha Graham, the manager of Presto Print, wants to expand the business but to do so she needs to buy two new printing machines valued at R110 000. She was convinced that she would need to get a bank loan to buy the additional machines but her corporate banker was not getting back to her with an answer on her request for finance.

Getting frustrated she wondered whether there was another option. An examination of her recent set of financial statements reveals that there may be.

Step 2

Assess whether the number of days’ cash in each element of the cash cycle is reasonable

Based on the table of comparisons, it is evident that Samantha Graham needs to implement better accounts receivable management practices at Presto Print. The number of days’ cash in accounts receivable is creeping up over time and it is much higher than the firm policy and the industry average. It also appears that there is room for improvement in her inventory management practices.

She has too many days’ worth of cash tied up in inventory compared to the industry average and she has never established an inventory management policy specifying how much inventory she intends to keep on hand. There appears to be less opportunity to release cash through the accounts payable balance. It would be irresponsible to extend it much higher than its current level as her suppliers credit policy is for outstanding invoices to be paid on 30 days.

Step 3

Set targets for managing each element of the cash cycle

The next step is to set targets for how many days’ cash Presto Print should aim to have tied up in each element of the cash cycle. Based on the assessment of the industry averages and the firm policies and after consultation with the other employees in her business, Samantha Graham decided to set the following targets:

Accounts receivable days: 36 days

Inventory days: 30 days

Accounts payable days: 35 days

To achieve these targets she would need to reduce accounts receivable by 11,93 days, which would result in (R2 101 085 /365 days) x 11,93 days = R68 673 extra cash. If she reduced inventory down to 30 days she would release another (R845 095/365 days) x 38,92 days = R90 113 worth of cash into the business. Therefore, through careful management of the accounts receivable and inventory balance there is the potential to release more than R150 000 worth of cash into the business at current business levels.

Step 4

Go to work at managing each element of the cash cycle

Having established reasonable targets for each element of the cash cycle, the next step is to aggressively manage these elements of the business to achieve the targets.

To do this, Samantha Graham first shared the targets with all her staff and explained why and how the management of these elements of the business would have a significant positive impact on the business. Furthermore, she promised that if they achieved the targets and maintained them for six months she would take them and their partners out for a dinner at a fancy restaurant and grant each of them two extra days of paid leave in the following year.

Thereafter, she worked with her accountant to put more processes in place to get invoices out quicker and to follow up on payments five days before they are due, on the day they are due and every two days after they are overdue. She also reviewed her debtors book over the last two years and identified the clients that were most guilty of paying very late. She called each one up and had a friendly but firm conversation with them saying that she was thrilled to have their business but then reminding them of the policies and asking them in a nice way to please try to comply.

Furthermore, she reviewed the inventory balances for the past two years and discovered that they were keeping large amounts of paper on hand that was very seldom requested by clients. She identified all the paper that fell into this category and called her supplier asking if they would be willing to take some of it back at a discount as payment for some of Presto Print’s recent purchases. They agreed! She then categorised all the paper and ink that they stored on hand according to how regularly it was used. She set targets for the amount of each category of inventory

they would keep on hand. She then called Presto Print’s suppliers to confirm how long it would take them to deliver paper and ink from the time of order. Using this information she set reorder levels for each category of inventory. She made the reorder levels clear to all her staff and instructed them to inform her when they reached the reorder levels. After seven months of implementing these simple but effective tactics, the accounts receivable and inventory levels were nearing their targets and Samantha had much more free cash flow in the business to fund growth and capital acquisitions.

Step 5

Review progress

After a few months, Samantha asked her accountant to create a simple weekly report that would give her the weekly sales, the number and amount of invoices sent out that week, the accounts receivable balance, the inventory balances by category and the accounts payable balance. This information gave her much richer insight into her business and allowed her to make highly informed management decisions. She put the targets for accounts receivable days, inventory days and accounts payable days up on a large whiteboard in the office. Each month she filled in the actual balance next to the target so that all employees could see how close they were to achieving the target.

Greg Fisher, PhD, is an Assistant Professor in the Management & Entrepreneurship Department at the Kelley School of Business, Indiana University. He teaches courses on Strategy, Entrepreneurship, and Turnaround Management. He has a PhD in Strategy and Entrepreneurship from the Foster School of Business at the University of Washington in Seattle and an MBA from the Gordon Institute of Business Science (GIBS). He is also a visiting lecturer at GIBS.

18 Ways I’ve Earned Rent Money When I Was Broke

It’s an interesting world out there. In the past five years I’ve gone from being worth millions to being broke to being worth a millions again. There’s been more than one month where I didn’t have enough money to pay rent. There are times you need money, and need it quick.

With a more connected world, there are more opportunities to make money doing micro jobs and taking advantage of constantly evolving opportunities. Plus, globalisation has opened the door to add value for people well outside of your immediate proximity.

Here are 18 quick ways I’ve made money to pay rent when money is tight:

1. Teach a skill that you’ve mastered to others

If you are a talented musician, athlete or you have other desired skills, you could get paid to teach others. You could either become a freelanceteacher or look for a service that helps match you with clients. This is an opportunity to make some serious money, improve your teaching ability and help others. Do not underestimate all of the time you spent as a kid playing the piano or learning to do backflips.

I’ve been able to scrounge up $100 teaching math to neighbourhood kids. This could turn into a longer gig as well.

2. Drive for Uber and/or Lyft

There are a few prerequisites you have to meet to become a driver. Assuming you are 21+, have been driving for three years, have a clean record and a nice enough car, though, you can make serious money driving for Uber or Lyft. You can be a driver for both at the same time, and can drive at whatever hours you want.

It took me about a week to be all setup to drive. So it’s not an overnight money situation, but it’s a quick way to make some money for bills. Most of the time money is deposited very quickly, often the same day.

3. Put a room in your house on Airbnb

There are inconveniences that come with being an Airbnb host, but it is quite easy to do so. As long as you have a room to spare in your house, you can rent it out for extra money. Plus, it could give you an opportunity to meet and connect with interesting people.

It took about three weeks for me to get set-up, actually host guests and see money in my bank account. It can happen faster but that’s about the timeframe it took me.

4. Build a social media brand

Social media is quickly becoming the world’s most powerful platform for generating revenue and reaching an audience. While the ecosystem is becoming more and more competitive, there are a number of tools you can leverage to stand out.

I’ve personally used this Instagram automation serviceto help me accelerate my growth quickly and gain new followers. It is important to invest in generating high quality content such that you develop loyalty among your fans before you begin to monetise.

I now can earn a few hundred bucks quickly by pushing brands out online.

5. Go through your old things and sell them

You likely have books, clothes and other novelty items lying around that you no longer use. Spending a few days to go through those things and list them on Amazon, eBay or other sites to make some extra cash.

6. Pickup jobs on Fiverr

There are countless tasks on Fiverr that you can pick up. None by itself is a large amount of money but doing many tasks, though, can add up to a nice chunk of cash.

Money comes a few days after the task is completed. Most are cheaper tasks with demanding customers but can really start to add up. One month I paid all my bills from just working on Fiverr at $5 per gig that I did.

7. Dog walker/sitter

You can do this on a neighbourhood level or use a service to find clients. Walking or sitting for dogs tends is minimal effort for extra cash. Plus, if you like animals, what is better than getting paid to spend time with them?

I recommend starting small, say $1-2 per hour and working your way up once you have stable clients. It’s not much, but it can start to add up over time plus give you enough money to make bills.

8. Take advantage of credit card deals

There are countless credit card deals that are always popping up. Managing multiple cards is not the most fun, but it can yield you significant benefits. Be on the lookout for these deals. Some require that you spend a certain amount on the card within the first few months, and others have yearly fees. If the money that you are getting is greater than your costs, though, they can be a great use of time. Plus, if you are spending a certain amount of money anyway, you might as well do so on a card that will give you the maximum benefits in return.

9. Go thrift shopping and resell the best items

People turn in some awesome items to thrift stores. Going through the stores to find good deals is both fun and rewarding. You will likely find some items you can resell for a nice profit, and you might even find some cheap things to keep.

10. Proofread

You can get paid to proofread articles, books, and journals today. You have to be meticulous and able to stare at a screen for a while, but it is nice and relaxing money in return. Sites like Freelancercan help you find clients to do the proofreading for.

11. Do surveys and studies

Services like Mechanical Turk will pay you to take surveys, and there are always listings to get paid for participating in studies. The work can be a bit monotonous, but it is typically a mindless way to make money.

12. Keep your email receipts

You can make money today simply by not deleting receipts that come via email. Earnyautomatically scans your email for old receipts and matches what you paid to current prices. When there is something being sold for less money, now, they will help you get the difference back.

13. Take advantage of your data

There are services that will give you money just for offering access to your data. For example,Nielsen gives money away just by letting them install a software on your computer that tracks your habits. It might feel scary to give others access to this data, but in many cases, it will have zero impact on you.

14. Make a bet to do something that will improve your life

If you have a goal you are trying to accomplish, make a bet with someone that you can do it.

This could be a great way to lose weight or pick up a new talent. It will incentivise you to actually do so, and you will be able to make some money for your efforts. Keep track of this in your calendar app.

15. Be a mystery shopper

You can get paid to pose as a regular customer for services like pizza delivery. Mystery shoppers are how companies test their customer service, and, in return, you can will get paid. You have to find the right deals, but doing so offers another effortless way to make money.

16. Become a search engine evaluator

17. Sell your trash or recycling

There are countless companies that will pay for your empty cans and sometimes even your trash. You are going to be creating the waste anyways, so why not take advantage of it?

18. Approach companies for consulting services

If you have a skill that you think you can help businesses with, then approach them about it. Many companies, even successful ones, struggle in a variety of different areas. If you know what you are doing and can demonstrate that, you could make some serious money helping a company out. This could especially be the case for companies that do not have enough money to hire more people full time but have enough to pay a one-time fee for a project or service. Hot topics today include SEO, digital marketing, and design.

Ready to take your making money to the next level? Here is a quick self employedguide to help you get started.

4 Scenarios When It Makes Good Sense To Take On Business Debt

You need to invest money into your business to make it grow. You need money to expand your workspace, buy more materials or equipment and to market your business.

Without an infusion of money, your business will remain stagnate. You might be able to grow a little bit, but you’ll never get big results.

If your business doesn’t bring in a large revenue that can be funneled back into the business, you’ll likely need some type of loan. The loan will give you a financial boost, and you can pay off the loan with increased revenue from business growth.

You shouldn’t automatically think of debt as a bad thing. Debt is often necessary to grow. But, there are good times and bad times to take on debt.

Here are four times taking on debt is beneficial to business growth.

1. You want to provide more products

If you want to offer new products or carry more inventory of current products, you need money to buy them. Getting a small business loan can give you enough money to provide more products.

When you carry more inventory, you need space to store and display it. You might use a storage unit, buy a second location, move to a larger location or maybe even add on. Small business debt can help you purchase more space.

2. You want to increase your marketing efforts

You will only get more customers by getting the word out about your business. That’s why you need small business marketing.

Marketing doesn’t have to be expensive. You might create something as simple as flyers or do basic social media marketing. But, to reach more people, you might need more elaborate marketing tactics. You can invest in magazine ads, radio ads, billboards, pay-per-click ads and more. To achieve marketing success, you might need to consider taking out a small business loan. The extra cash will let you market your business well. You can pay off the loan with the increased revenue from the influx of new customers.

3. You want to build your credit score

You need good credit to get a loan. Plus, good credit can get you better payment terms with your vendors. But to get good credit, you need experience with taking on and paying off debt.

Taking out small loans can improve your business credit score. Small loans show that you are responsible and capable of handling debt. And when you make payments on time, your credit score increases.

Once you build up your credit and prove to lenders that you can handle debt, they will be more willing to give you larger loans. And, your score and timeliness might result in better loan terms, such as lower interest rates.

4. You want to hire employees

At some point, you might spend so much time on your business that it consumes your life. You might miss out on time with your family and friends. Or, you might have so much business stuff to do that you can’t get everything done.

Hiring an employee can help you grow your business. You can get more done and produce better quality work. You can hire employees who have special skills that will benefit your business.

Spending money on an employee is worth it if having that employee can help you earn more money. If this is the case, you might take out a loan to help prepare for the employee, cover recruiting fees, and pay for wages until your business begins earning more. When figuring out how big of a loan to take out, make sure you consider the true cost of hiring an employee.

The traditional model of stokvels are evolving. A major draw card that comes with starting or joining a stokvel club is the group buying power that comes from the cooperative model. Yes, this can be used to secure significant discounts from wholesalers in many instances when making bulk purchases and sharing these savings across members. However, as stokvels have evolved over time, we are seeing more and more stokvels looking to use their group buying power to make “smart purchases” that can turn a profit in the long run.

Arguably becoming business club orientated instead of consumer club orientated. This article explores smart tactics stokvels can employ to get the most bang for their buck in 2018 instead of purely being consumption based.

How do you generate income with your group buying power?

Getting a great deal on perishable goods is never a bad thing. However, your stokvel can do a lot more with its buying power to earn revenue for its members. Our foreign brothers and sisters from the rest of Africa who are running spaza shops have unlocked one of the secrets to this. Using their collective buying power to amass perishable items at notably discounted rates to sell at a highly competitive rate, they are able to earn revenue from the cooperative model approach. This principle can apply in any business where bulk buying opportunities exist for “cooperatives”.

For example, minibus taxi owners/associations looking to get better deals can galvanise and approach car manufacturers and those who sell parts for better bulk discounted prices on vehicles or parts. The trick here is to look at purchasing “perishable goods” that as their value or usage gets discounted, you are able to generate revenue out of them higher than the purchasing amount.

How to identify perishable goods that can generate revenue for you or your stokvel?

Based on the taxi and spaza shop examples above, arguably it is easier to identify such goods when you are in a common business with your stokvel members. However, this is an economics exercise i.e. identifying goods which are high in demand that you’re stokvel can supply at a profitable rate. As a stokvel, you should be asking yourselves what are essential perishable goods that are in high demand, that your family, close friends and immediate neighbours need. For example, toilet paper is a perishable good that is and always will be in demand. Would it not make sense to source this perishable item at a bulk for sale to friends and family of the stokvel?

Better yet, if one of the stokvel club members has enough storage space, would it not make sense to purchase the toilet paper making machine as an asset? Your stokvel must get entrepreneurial about the immediate opportunities that exist around them and see how best to take advantage of these gaps. However, if your stokvel does not have a slight of entrepreneurial bone in it not to worry. There are innovative ways for your stokvel to purchase such assets that yield great returns for your stokvel club. One such way to do this is through asset crowdfunding platform, The People’s Fund.

The truth is that your bulk buying power strength depends on how well your cooperative model approach is organised and well run. The stronger your cooperative model approach, the stronger you will likely leverage off other forms of revenue generators better than perishable goods such as asset rental discounting products.

At the end it comes down to not only how much you have managed to save but also how well you can generate additional revenue from your savings. After all, isn’t money suppose to work for you?